Related party transactions as a source of earnings management

• Autores: Jean Jinghan Chen, P. Cheng, X. Xiao
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 21, Nº. 1-3, 2011, págs. 165-181
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • In this article, we contribute to the earnings management literature by addressing the issue of Related Party Transactions (RPTs) during a firm's Initial Public Offering (IPO) process. We regard RPT-based earnings management as a kind of agency problem in the context of Chinese IPOs, and argue that the conflicts of interests between the controlling shareholders and the minority shareholders are the root of RPT-based earnings management in Chinese IPOs. We provide empirical evidence to demonstrate that RPT-based earnings management in a portfolio of earnings management tools including accruals management, and how it affects the firm's post-IPO long-term performance in China. Using 257 Chinese A and B shares IPOs during 1999 and 2000, our empirical findings suggest that controlling shareholders structure operating RPTs in pre-IPO period and these RPTs are positively associated with firm's operating performance. The decline in operating RPTs after IPO contributes to firm's post-IPO long-term underperformance and negatively affects firms' stock return.